Chapter E: Enhancing social and market outcomes

E1. User charging

Key points

Public goods should generally be funded from broad-based taxes. However, user charging can be an efficient means of financing some government-provided goods and services and of rationing individual access to community resources.

For user charging to be efficient, the user needs to be charged the cost that consuming the good or service imposes on others. This cost will often be what a well-functioning market would charge, but might need to be higher or lower depending on whether there are wider social costs or benefits.

Australian governments do not employ user charging as much as they should, particularly for natural resources. User charging should generally not be used to fund public goods, as users do not directly impose costs on others.

If it is possible to exclude some people from access to a public good, there is potential for it to be financed by a tax set by the direct beneficiaries (such as many agricultural levies). Importantly, this provides a means for the beneficiaries to reveal how much they value the public good.

Taxes and regulations can also be used to correct for spillover costs. Regulatory costs should be recovered from those who are best able to reduce the social costs the regulation is targeting. This will often, but not always, be those who impose on others the costs that lead to the need for regulation.